U.S. deficit poses potential systemic risk: Taylor

JACKSON HOLE, Wyoming Fri Aug 21, 2009 6:50pm EDT

JACKSON HOLE, Wyoming (Reuters) - The U.S. budget deficit poses more of a potential risk to the financial system than the collapse in commercial real estate prices, an influential economist said on Friday.

"We have a huge deficit. ... The stimulus package is generating a lot more debt, and there are systemic issues there," Stanford University economics professor John Taylor told Reuters Television on the sidelines of the Federal Reserve's annual Jackson Hole conference.

The Obama administration expects the deficit to hit a record $1.58 trillion this year, and sees a cumulative $9 trillion of additional red ink in 2010-1019.

"If that gets out of control, if interest rates start to rise because people are reluctant to buy all that debt then that can slow the economy down. So, that's the more systemic concern I have," Taylor said.

With an estimated $400 billion in commercial real estate debt set to mature this year and another $300 billion due in 2010, the sector is facing an acute crisis.

But Taylor said it was not clear the sector's woes pose a systemic risk.

"It's a risk for commercial real estate that's for sure, but the question is what kind of risk it is for the rest of the economy, and it seems to be there isn't as much of a concern there as there has been for housing for such a length of time," he said.

(Reporting by Kristina Cooke and Dan Burns; Editing by Leslie Adler)